Spectre of deleveraging haunts central Europe

Deleveraging is crimping credit throughout central and eastern Europe as foreign owned banks that make up the bulk of domestic financial sector retrench to their home markets, bankers and economists have warned.

Marek Belka, governor of the Polish central bank, took a side-swipe at banks headquartered in developed markets that have been reducing credit. “It’s not clear that there’s too much debt in central europe,” he said in a speech to the EBRD.

“The business of banks here has been very profitable and successful so there’s no obvious reason why deleveraging should be focused here.”

Belka, a former top IMF official, added that debt as the key ingredient in economic growth models going forward is now a defunct model: “The previous model of debt-driven growth is a matter of the past. That is, in my opinion, is the most challenging task we are facing.”

Erik Berglof, chief economist at the EBRD said the withdrawal of funding continued to be a major worry although it has been taking place at a slower pace than last year.

Thomas Maier, managing director of infrastructure at the EBRD, added: “We are in an almost perfect storm where you have a banking sector that has to deleverage”.

Sviatoslav Didenko, head of international business at Kreditprombank in Kiev, said that while banks needed to bring assets into equilibrium, deleveraging was more dangerous in countries where the banking models are particularly reliant on foreign funding.

A home bias has already materialized in some countries, he noted. Parent bank repairs, however much needed, should not hurt the economies of the host countries, he said. More and more foreign banks are pulling out of Ukraine and confidence in the country is falling all the time, he noted.

Belka said: “If problems arising in the relationship ‘home-host’ countries are not solved in a cooperative spirit, they will pose a serious risk to financial integration in the EU.”

Host countries may pursue policies “that are not in line with the principles of the Single Market,” he warned. He pointed to the Vienna 2.0 process as a cooperative solution.

Belka added that the inter-connectedness of financial markets means developing cross-border supervision was key to solving the financial crisis and more needed to be done. “Attempts to introduce a cross-border dimension into the supervisory system go in the right direction, but are of a partial nature and as such cannot probably function smoothly,” he noted. He cautioned that some of the Basel III proposals could disproportionately impact the expansion of credit in emerging markets.

As banks worry about deleveraging, a possible Greek exit from the eurozone could hit banks especially hard in south-east Europe where Greek ownership accounts for a high percentage of assets.

Romanian, Bulgarian and Serbian authorities are concerned and communicating with Greek authorities regularly, said Berglof. The IMF might need to support these countries if there were additional problems, he noted.